UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549 

____________________________________________ 

FORM 10-Q

(Mark One)

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended October 1, 2021

OR

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from             to             

Commission file number 001-15885

MATERION CORPORATION

(Exact name of Registrant as specified in charter)

Ohio	34-1919973
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

6070 Parkland Blvd., Mayfield Heights, Ohio 44124

(Address of principal executive offices) (Zip Code)

Registrant’s telephone number, including area code:

(216)-486-4200

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, no par value	MTRN	New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes þ       No  ¨

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes  þ        No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer þ Accelerated filer  ¨

Non-accelerated filer  ¨ Smaller reporting company ☐

Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨    

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐     No  þ

Number of Shares of Common Stock, without par value, outstanding at October 1, 2021: 20,439,191.

PART 1 - FINANCIAL INFORMATION

Item 1. Financial Statements

Materion Corporation and Subsidiaries

Consolidated Statements of Income

(Unaudited)

	Third Quarter Ended				Nine Months Ended
(Thousands, except per share amounts)	October 1, 2021		September 25, 2020*		October 1, 2021		September 25, 2020*
Net sales	$	388,028	$	287,171	$	1,113,413	$	836,585
Cost of sales	313,715		241,860		902,723		699,749
Gross margin	74,313		45,311		210,690		136,836
Selling, general, and administrative expense	43,195		35,696		118,031		99,292
Research and development expense	6,354		5,417		19,164		14,104
Goodwill impairment charges	—		—		—		9,053
Asset impairment charges	—		—		—		1,713
Restructuring (income) expense	—		2,593		(378)		7,144
Other—net	3,604		2,221		12,272		4,143
Operating profit (loss)	21,160		(616)		61,601		1,387
Other non-operating income—net	(1,279)		(1,076)		(3,832)		(2,871)
Interest expense—net	861		1,334		2,480		2,839
Income (Loss) before income taxes	21,578		(874)		62,953		1,419
Income tax expense (benefit)	3,422		(6,345)		10,162		(5,977)
Net income	$	18,156	$	5,471	$	52,791	$	7,396
Basic earnings per share:
Net income per share of common stock	$	0.89	$	0.27	$	2.59	$	0.36
Diluted earnings per share:
Net income per share of common stock	$	0.88	$	0.27	$	2.56	$	0.36
Weighted-average number of shares of common stock outstanding:
Basic	20,439		20,325		20,414		20,342
Diluted	20,657		20,592		20,659		20,595

*Amounts for the periods ended September 25, 2020 have been adjusted to reflect the change in inventory accounting method, as described in Note A to the Consolidated Financial Statements in the Company's 2020 Annual Report on Form 10-K.

See notes to these consolidated financial statements.

2

Materion Corporation and Subsidiaries

Consolidated Statements of Comprehensive Income

(Unaudited)

	Third Quarter Ended				Nine Months Ended
	October 1,		September 25,		October 1,		September 25,
(Thousands)	2021		2020*		2021		2020*
Net income	$	18,156	$	5,471	$	52,791	$	7,396
Other comprehensive (loss) income:
Foreign currency translation adjustment	(2,029)		3,076		(7,693)		3,369
Derivative and hedging activity, net of tax	439		(315)		1,411		(822)
Pension and post-employment benefit adjustment, net of tax	121		29		368		134
Other comprehensive (loss) income	(1,469)		2,790		(5,914)		2,681
Comprehensive income	$	16,687	$	8,261	$	46,877	$	10,077

*Amounts for the periods ended September 25, 2020 have been adjusted to reflect the change in inventory accounting method, as described in Note A to the Consolidated Financial Statements in the Company's 2020 Annual Report on Form 10-K.

See notes to these consolidated financial statements.

3

Materion Corporation and Subsidiaries

Consolidated Balance Sheets

(Unaudited)

	October 1,		Dec. 31,
(Thousands)	2021		2020
Assets
Current assets
Cash and cash equivalents	$	18,009	$	25,878
Accounts receivable, net	190,601		166,447
Inventories, net	311,745		250,778
Prepaid and other current assets	36,138		20,896
Total current assets	556,493		463,999
Deferred income taxes	1,908		3,134
Property, plant, and equipment	1,069,592		998,312
Less allowances for depreciation, depletion, and amortization	(715,158)		(688,626)
Property, plant, and equipment, net	354,434		309,686
Operating lease, right-of-use assets	56,556		62,089
Intangible assets, net	49,012		54,672
Other assets	23,269		19,364
Goodwill	140,990		144,916
Total Assets	$	1,182,662	$	1,057,860
Liabilities and Shareholders’ Equity
Current liabilities
Short-term debt	$	529	$	1,937
Accounts payable	71,576		55,640
Salaries and wages	37,168		18,809
Other liabilities and accrued items	54,749		40,887
Income taxes	439		1,898
Unearned revenue	8,308		7,713
Total current liabilities	172,769		126,884
Other long-term liabilities	17,572		17,002
Operating lease liabilities	52,177		56,761
Finance lease liabilities	17,285		20,539
Retirement and post-employment benefits	39,216		41,877
Unearned income	93,061		86,761
Deferred income taxes	14,118		15,864
Long-term debt	79,036		36,542
Shareholders’ equity
Serial preferred stock (no par value; 5,000 authorized shares, none issued)	—		—
Common stock (no par value; 60,000 authorized shares, issued shares of 27,148 at both October 1st and December 31st)	269,716		258,642
Retained earnings	676,527		631,058
Common stock in treasury	(208,952)		(199,187)
Accumulated other comprehensive loss	(44,553)		(38,639)
Other equity	4,690		3,756
Total shareholders' equity	697,428		655,630
Total Liabilities and Shareholders’ Equity	$	1,182,662	$	1,057,860

See the notes to these consolidated financial statements.

4

Materion Corporation and Subsidiaries

Consolidated Statements of Cash Flows

(Unaudited)

	Nine Months Ended
	October 1,		September 25,
(Thousands)	2021		2020*
Cash flows from operating activities:
Net income	$	52,791	$	7,396
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, depletion, and amortization	32,478		32,042
Amortization of deferred financing costs in interest expense	546		547
Stock-based compensation expense (non-cash)	4,924		3,989
Deferred income tax benefit	(263)		(5,981)
Impairment charges	—		10,766
Changes in assets and liabilities, net of acquired assets and liabilities:
Accounts receivable	(26,041)		13,899
Inventory	(62,353)		(6,414)
Prepaid and other current assets	(7,020)		(686)
Accounts payable	14,863		6,281
Accrued expenses	20,451		(16,040)
Unearned revenue	650		(298)
Interest and taxes payable	(1,504)		143
Unearned income due to customer prepayments	9,022		40,385
Other-net	1,974		(6,585)
Net cash provided by operating activities	40,518		79,444
Cash flows from investing activities:
Payments for acquisition, net of cash acquired	—		(130,715)
Payments for purchase of property, plant, and equipment	(77,640)		(46,285)
Proceeds from settlement of currency exchange contract	—		3,249
Proceeds from sale of property, plant, and equipment	686		35
Net cash used in investing activities	(76,954)		(173,716)
Cash flows from financing activities:
Proceeds from borrowings under revolving credit agreement, net	43,010		120,000
Repayment of long-term debt	(1,803)		(16,357)
Principal payments under finance lease obligations	(2,152)		(1,440)
Cash dividends paid	(7,243)		(6,920)
Repurchase of common stock	—		(6,766)
Payments of withholding taxes for stock-based compensation awards	(3,033)		(2,212)
Net cash provided by financing activities	28,779		86,305
Effects of exchange rate changes	(212)		714
Net change in cash and cash equivalents	(7,869)		(7,253)
Cash and cash equivalents at beginning of period	25,878		125,007
Cash and cash equivalents at end of period	$	18,009	$	117,754

*Amounts for the period ended September 25, 2020 have been adjusted to reflect the change in inventory accounting method, as described in Note A to the Consolidated Financial Statements in the Company's 2020 Annual Report on Form 10-K.

See notes to these consolidated financial statements.

5

Materion Corporation and Subsidiaries

Consolidated Statements of Shareholders' Equity

(Unaudited)

	Common Shares		Shareholders' Equity
(Thousands, except per share amounts)	Common Shares	Common Shares Held in Treasury	Common Stock		Retained Earnings*		Common Stock in Treasury		Accumulated Other Comprehensive Loss		Other Equity		Total*
Balance at July 2, 2021	20,438	(6,710)	$	268,205	$	660,851	$	(208,854)	$	(43,084)	$	4,583	$	681,701
Net income	—	—	—		18,156		—		—		—		18,156
Other comprehensive income	—	—	—		—		—		(1,469)		—		(1,469)
Cash dividends declared ($0.12 per share)	—	—	—		(2,452)		—		—		—		(2,452)
Stock-based compensation activity	—	—	1,458		(28)		(18)		—		—		1,412
Payments of withholding taxes for stock-based compensation awards	—	—	—		—		(12)		—		—		(12)
Directors’ deferred compensation	1	1	53		—		(68)		—		107		92
Balance at October 1, 2021	20,439	(6,709)	$	269,716	$	676,527	$	(208,952)	$	(44,553)	$	4,690	$	697,428
Balance at June 26, 2020	20,322	(6,826)	$	256,756	$	622,219	$	(198,726)	$	(45,571)	$	3,678	$	638,356
Net income	—	—	—		5,471		—		—		—		5,471
Other comprehensive income	—	—	—		—		—		2,790		—		2,790
Cash dividends declared ($0.115 per share)	—	—	—		(2,338)		—		—		—		(2,338)
Stock-based compensation activity	7	7	235		19		(231)		—		—		23
Payments of withholding taxes for stock-based compensation awards	(3)	(3)	—		—		(187)		—		—		(187)
Directors’ deferred compensation	1	1	28		—		(41)		—		70		57
Balance at September 25, 2020	20,327	(6,821)	$	257,019	$	625,371	$	(199,185)	$	(42,781)	$	3,748	$	644,172

6

	Common Shares		Shareholders' Equity
(Thousands, except per share amounts)	Common Shares	Common Shares Held in Treasury	Common Stock		Retained Earnings*		Common Stock in Treasury		Accumulated Other Comprehensive Loss		Other Equity		Total*
Balance at December 31, 2020	20,328	(6,820)	$	258,642	$	631,058	$	(199,187)	$	(38,639)	$	3,756	$	655,630
Net income	—	—	—		52,791		—		—		—		52,791
Other comprehensive loss	—	—	—		—		—		(5,914)		—		(5,914)
Cash dividends declared ($0.355 per share)	—	—	—		(7,243)		—		—		—		(7,243)
Stock-based compensation activity	152	152	10,932		(79)		(5,929)		—		—		4,924
Payments of withholding taxes for stock-based compensation awards	(45)	(45)	—		—		(3,033)		—		—		(3,033)
Directors’ deferred compensation	4	4	142		—		(803)		—		934		273
Balance at October 1, 2021	20,439	(6,709)	$	269,716	$	676,527	$	(208,952)	$	(44,553)	$	4,690	$	697,428
Balance at December 31, 2019	20,404	(6,744)	$	249,674	$	624,954	$	(186,845)	$	(45,462)	$	3,422	$	645,743
Net income	—	—	—		7,396		—		—		—		7,396
Other comprehensive loss	—	—	—		—		—		2,681		—		2,681
Cash dividends declared ($0.34 per share)	—	—	—		(6,920)		—		—		—		(6,920)
Stock-based compensation activity	117	117	7,272		(59)		(3,133)		—		—		4,080
Payments of withholding taxes for stock-based compensation awards	(39)	(39)	—		—		(2,212)		—		—		(2,212)
Repurchase of shares	(158)	(158)	—		—		(6,766)		—		—		(6,766)
Directors’ deferred compensation	3	3	73		—		(229)		—		326		170
Balance at September 25, 2020	20,327	(6,821)	$	257,019	$	625,371	$	(199,185)	$	(42,781)	$	3,748	$	644,172

*Amounts for the periods ended September 25, 2020 have been adjusted to reflect the change in inventory accounting method, as described in Note A to the Consolidated Financial Statements in the Company's 2020 Annual Report on Form 10-K.

See notes to these consolidated financial statements.

7

Materion Corporation and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

Note A — Accounting Policies

Basis of Presentation: The accompanying consolidated financial statements of Materion Corporation and its subsidiaries (referred to herein as the Company, our, we, or us) contain all of the adjustments necessary to present fairly the financial position, results of operations, and cash flows for the interim periods reported. All adjustments were of a normal and recurring nature. Certain amounts in prior periods have been reclassified to conform to the 2021 consolidated financial statement presentation.

These consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes included in the Company's 2020 Annual Report on Form 10-K. The interim period results are not necessarily indicative of the results to be expected for the full year.

Business Combinations: The Company records assets acquired and liabilities assumed at the date of acquisition at their respective fair values. Any intangible assets acquired in a business combination are recognized and reported apart from goodwill. Goodwill represents the excess purchase price over the fair value of the tangible net assets and intangible assets acquired in a business combination. Acquisition-related expenses are recognized separately from the business combination and are expensed as incurred.

Change in Accounting Principle: During the fourth quarter of 2020, the Company elected to change its method for valuing its inventories at locations that previously used the last-in, first-out (LIFO) method to the first-in, first-out (FIFO) method. The Company believes that the FIFO method is preferable as it improves comparability with its most similar peers, it more closely resembles the physical flow of its inventory (i.e., it provides better matching of revenues and expenses), and it results in uniformity across a significant majority of the Company’s inventory. The effects of the change in accounting principle from LIFO to FIFO were retrospectively applied. As a result of the retrospective application of the change in accounting principle, certain financial statement line items in the Company’s consolidated balance sheet as of September 25, 2020 and the consolidated statements of income, comprehensive income, shareholders’ equity, and cash flows for the three and nine months ended September 25, 2020 were adjusted as necessary. For further information, refer to the Company's 2020 Annual Report on Form 10-K.

8

Materion Corporation and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

The following tables reflect the impact to the financial statement line items as a result of the change in accounting principle for the prior periods presented in the accompanying financial statements:

Consolidated Statement of Income

(Thousands except per share amounts)
	Third Quarter Ended						Nine Months Ended
	September 25, 2020						September 25, 2020
Selected Items	As Reported		As Adjusted		Adjustment		As Reported		As Adjusted		Adjustment
Cost of sales	$	240,531	$	241,860	$	1,329	$	696,280	$	699,749	$	3,469
Gross margin	46,640		45,311		(1,329)		140,305		136,836		(3,469)
Operating profit (loss)	713		(616)		(1,329)		4,856		1,387		(3,469)
Income (Loss) before income taxes	455		(874)		(1,329)		4,888		1,419		(3,469)
Income tax benefit	(6,041)		(6,345)		(304)		(5,183)		(5,977)		(794)
Net income	6,496		5,471		(1,025)		10,071		7,396		(2,675)
Basic earnings per share:
Net income per share of common stock	$	0.32	$	0.27	$	(0.05)	$	0.50	$	0.36	$	(0.14)
Diluted earnings per share:
Net income per share of common stock	$	0.32	$	0.27	$	(0.05)	$	0.49	$	0.36	$	(0.13)

Consolidated Statement of Comprehensive Income

(Thousands)
	Third Quarter Ended						Nine Months Ended
	September 25, 2020						September 25, 2020
Selected Items	As Reported		As Adjusted		Adjustment		As Reported		As Adjusted		Adjustment
Net income	$	6,496	$	5,471	$	(1,025)	$	10,071	$	7,396	$	(2,675)
Comprehensive income	9,286		8,261		(1,025)		12,752		10,077		(2,675)

Consolidated Statement of Cash Flows

(Thousands)
	Nine Months Ended
	September 25, 2020
Selected Items	As Reported		As Adjusted		Adjustment
Net income	$	10,071	$	7,396	$	(2,675)
Deferred income tax benefit	(5,187)		(5,981)		(794)
Increase in inventory	(9,883)		(6,414)		3,469

New Pronouncements Adopted: In December 2019, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2019-12, Income Taxes (Topic 740) - Simplifying the Accounting for Income Taxes, which simplifies the accounting for income taxes by removing various exceptions, such as the exception to the incremental approach for intra-period tax allocation when there is a loss from continuing operations and income or a gain from other items. The amendments in this update also simplify the accounting for income taxes related to income-based franchise taxes and require that an entity reflect enacted tax laws or rates in the annual effective tax rate computation in the interim period that includes the enactment date. The Company adopted the standard on January 1, 2021. The adoption did not materially impact the Company's financial statements or disclosures.

New Accounting Guidance Issued and Not Yet Adopted: In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. This guidance is intended

9

Materion Corporation and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

to provide temporary optional expedients and exceptions to the U.S. GAAP guidance on contract modifications and hedge accounting to ease the financial reporting burden related to the expected market transition from the London Interbank Offered Rate (LIBOR) and other interbank offered rates to alternative reference rates. This guidance is available immediately and may be implemented in any period prior to the guidance expiration on December 31, 2022. The Company is currently assessing which of its various contracts will require an update for a new reference rate, and will determine the timing for implementation of this guidance at the completion of that analysis.

No other recently issued or effective ASUs had, or are expected to have, a material effect on the Company's results of operations, financial condition, or liquidity.

Note B — Acquisition

Business acquisitions have been accounted for using the acquisition method, with acquired assets and assumed liabilities recognized at their respective fair values as of the acquisition date. The cost in excess of the net assets of the business acquired is included in goodwill.

On July 17, 2020, the Company completed the acquisition of Optics Balzers AG (Optics Balzers), an industry leader in thin film optical coatings. The purchase price for Optics Balzers was $136.1 million, including the assumption of $22.5 million of debt. The transaction was funded with cash on hand. Based on the fair value of assets acquired and liabilities assumed, goodwill of $70.8 million and identifiable intangible assets of $49.3 million were recorded. Goodwill associated with this acquisition is not tax deductible. This acquisition is being reported in the Company's Precision Optics segment and the results of Optics Balzers are not material to the Company's Consolidated Financial Statements. No material measurement period adjustments have been recorded during the third quarter or first nine months of 2021, and as of October 1, 2021, the purchase price allocation is complete.

Note C — Segment Reporting

The Company has the following reportable segments: Performance Alloys and Composites, Advanced Materials, Precision Optics, and Other. The Company’s reportable segments represent components of the Company for which separate financial information is available that is utilized on a regular basis by the Chief Executive Officer, the Company's chief operating decision maker, in determining how to allocate the Company’s resources and evaluate performance.

Performance Alloys and Composites produces strip and bulk form alloy products, strip metal products with clad inlay and overlay metals, beryllium-based metals, beryllium, and aluminum metal matrix composites, in rod, sheet, foil, and a variety of customized forms, and beryllia ceramics.

Advanced Materials produces advanced chemicals, microelectric packaging, precious metal, non-precious metal, and specialty metal products, including vapor deposition targets, frame lid assemblies, clad and precious metal preforms, high temperature, and braze materials.

Precision Optics produces thin film coatings, optical filter materials, sputter-coated, and precision-converted thin film materials.

The Other reportable segment includes unallocated corporate costs and assets.

10

(Thousands)	Performance Alloys and Composites		Advanced Materials		Precision Optics		Other		Total
Third Quarter 2021
Net sales	$	136,096	$	220,723	$	31,209	$	—	$	388,028
Intersegment sales	32		3,036		—		—		3,068
Operating profit (loss)	20,928		9,281		3,329		(12,378)		21,160
Third Quarter 2020
Net sales	$	91,203	$	165,582	$	30,386	$	—	$	287,171
Intersegment sales	—		6,602		—		—		6,602
Operating (loss) profit	(437)		5,749		1,421		(7,349)		(616)
First Nine Months 2021
Net sales	$	375,533	$	638,481	$	99,399	$	—	$	1,113,413
Intersegment sales	47		8,908		—		—		8,955
Operating profit (loss)	51,733		26,547		10,513		(27,192)		61,601
First Nine Months 2020
Net sales	$	291,884	$	475,855	$	68,846	$	—	$	836,585
Intersegment sales	2		24,790		—		—		24,792
Operating profit (loss)	9,910